Tag: SEBI

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SEBI Board Meeting Outcome

The SEBI board at its meeting held on March 29, 2023 has approved the following key amendments and changes to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“LODR”) and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“ICDR”).

Disclosure of material events

1. Introduction of quantitative materiality threshold for determination of materiality of events or information.

Regulation 4 of the LODR, casts the following obligations are on a listed entity:

  • The listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors
  • The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language.
  • Channels for disseminating information shall provide for equal, timely and cost efficient access to relevant information by investors.

Regulation 30(4) of the LODR requires disclosure of material information based on certain qualitative criteria, namely:

  • the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or
  • the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date;
  • In case where the criteria specified in sub-clauses (a) and (b) are not applicable, an event/information may be treated as being material if in the opinion of the board of directors of listed entity, the event / information is considered material.

Listed entities are also required to devise a materiality policy based on the above principles for disclosure of information. Generally, listed entities include a further quantitative criteria for disclosure of certain material events such as litigation. This may be in the form of any event which has a monetary or determinable impact, such as 10% of the profit after tax or 1% of the revenue of the listed entity. Basis the above amendment, similar monetary or quantifiable thresholds are likely to become applicable for all kinds of disclosures.

2. Timelines for disclosure of material events or information for decisions of the board of directors or emanating from within the listed entity

Presently, Regulation 30(6) of the LODR allows for disclosure of material events within a period of 24 hours from the event, with exceptions for certain decisions of the board, such as approval of dividends, buybacks, increases in capital or approval of financial results, which have to be intimated within 30 minutes of the conclusion of the meeting. The amendments approved would likely make the 30 minute timeline applicable for a wider range of board decisions, if not all, while the overall time period for disclosure of material information has been reduced from 24 hours to 12 hours.

3. Verification, confirmation or clarification of market rumours

With effect from October 1, 2023, the top 100 listed companies by market capitalisation will be required to verify, confirm or clarify on market rumours. This clarification or confirmation regime will be extended to the top 250 listed companies by market capitalisation on April 1, 2024. Based on the press-conference by the SEBI chairperson, we understand that this will be limited to mainstream media. One of the key points of interest will remain the definition of mainstream media, as the universe of information has increased exponentially in recent times with the advent of the digital news medium and social networking sites.

4. Disclosure of certain types of agreements binding listed entities

As per a recently released discussion paper, a new clause 5A is proposed to be incorporated in para A of Part A of Schedule III to the LODR to cover disclosure of any agreement that impacts the management or control of a listed entity or imposes any restriction or creates any liability on a listed entity. Further, agreements whose purpose and effect is to impact the management or control or impose any restriction or create any liability also needs to be disclosed. However, agreements entered by a listed entity for the business operations of a company (e.g. supply agreements, purchase agreements etc.) is proposed to be excluded from the scope of disclosures.

Further, the discussion paper had also proposed a takeover regulations type event based disclosure, making it obligatory on shareholders, promoters, promoter group members, directors, key managerial personnel or related parties to inform the listed entity of entering into such agreements.

Once enacted, the disclosure paper also envisaged disclosure of such agreements by June 30, 2023 and ratification by the board and shareholders of the listed entity at subsequent general meeting during Fiscal 2024.

Corporate governance norms

5. Periodic shareholder approval of special rights

With a view towards further strengthen  corporate governance norms at listed entities, SEBI has approved amendments to include a periodic approval of any special rights granted to certain shareholders. As per a recently issued discussion paper, the proposal was to seek shareholder approval for special rights, such as director nomination, at an interval of five years. The discussion paper had also proposed that the existing special rights available to shareholders be renewed within a period of five years from the date of notification of the amendments to the LODR. Depending upon the amendment regulations, it may also open flood gates for shareholders who were contemplating to avail special rights in a listed company. Moreover, as the SEBI board meeting mentions ‘any special right granted to a shareholder of a listed company’, it may lead to queries from private equity investors for retaining certain special rights (other than appointment of nominees) to be continued post the IPO of a company, on the grounds of the same being permitted in case of any listed company (subject to periodic shareholder approval).

6. Alignment of disclosure requirements for BTAs and schemes of arrangement

In terms of a recent discussion paper, SEBI had proposed to institute an additional mechanism for shareholder verification and approval of the process of disposal of undertakings or entities outside the scheme of arrangement process. Currently, the scheme of arrangement requires approval of the shareholders and stock exchanges, with certain exceptions and the amendment proposed would align the need to seek approval between business transfer agreements or slump sale arrangements with those applicable to schemes of arrangement.

The proposals included disclosure of objects and commercial rationale for such sale, disposal and/or lease to the shareholders with voting approval to be obtained from the majority of the minority shareholders. It should be noted that this approval would be in addition to approvals required from shareholders for disposal of assets under the Companies Act, 2013.

7. Periodic approval of directorship term

In the interest of good corporate governance at listed entities, all directors appointed to the board of a listed entity will need to go through periodic shareholders’ approval process, thereby providing legitimacy to the director to continue to serve on the board. In terms of the recent discussion paper, this would be on the similar lines being followed for the appointment / re-appointment of whole time directors and independent directors. The proposal set out in the discussion paper was to have such periodic shareholders’ approval at least once in every five years from the date of his / her first appointment to the board. For existing directors, who have not been subject to reappointment since April 1, 2019, the re-appointment would require to be obtained during Fiscal 2024.

8. Disclosure of financial statements by newly listed entities

Read with a recently issued discussion paper, the proposed amendment would require a newly-equity listed entity to disclose its first financial results post its listing, for the period immediately succeeding to the periods for which financial statements were disclosed in its offer document for initial public offer, within 15 days from the date of listing or as per the applicable timeline under LODR Regulations, whichever is later. The below illustration from the discussion paper dated February 20, 2023 helps explain the requirements:

For example, in case of listing on March 01, 2023, as per the requirement under ICDR Regulations, the issuer would have disclosed in its offer documents the financial results till the period ended September 30, 2022. Hence, post its listing, it would be required to disclose the financial results for the succeeding period, i.e., quarter ended December 31, 2022, within 15 days from the date of listing, i.e. by March 16, 2023.The annual financial results for the financial year ended March 31, 2023 would be required to be disclosed as per the timeline specified in the LODR Regulations, i.e., by May 30, 2023.

Having said that, SEBI in its board meeting has communicated that a streamlined approach will have to be followed by newly listed companies towards releasing their first set of financial results immediately post listing, primarily to bridge the gap between the financials as disclosed in the prospectus and subsequently post listing.

9. Timeline for filling up vacancies

Listed entities will be required to fill up the vacancy of the offices of directors, compliance officer, chief executive officer and chief financial officer within a period of three months from the date of such vacancy, to ensure that such critical positions are not kept vacant indefinitely.

Amendments to ICDR

10. Underwriting

In furtherance of the SEBI consultation of February 2023 on ICDR, , SEBI has approved amendments to the ICDR to legislate the difference between underwriting for shortfall in demand and underwriting for technical rejections or payment risk. In either case, if adopted, will require to be agreed upon by the issuer and the underwriters prior to the filing of the red herring prospectus and disclosed to the prospective investors. This development mandates issuers, selling shareholders (if any) and lead managers to evaluate the need to underwrite an IPO only at the red herring prospectus stage, after factoring all aspects during that phase until allotment of shares for any know or unknown event expected to hinder the IPO (whether directly or indirectly).

Suitable amendments to Regulation 40 of the ICDR, as suggested by the discussion paper are awaited.

11. Bonus issues

SEBI also approved two amendments in relation to bonus issues of shares by listed entities. First, as long as there is a mismatch between the issued and listed capital of a company, it shall not be entitled to undertake a bonus issue given that a bonus issuance announcement is price sensitive. Accordingly, SEBI has mandated to resolve such discrepancies in the share capital via seeking in-principal approvals by the issuer from the stock exchanges for all its pre-bonus shares. This is a positive move to iron out hindrances faced by bourses in granting in-principal approvals during the aforesaid situation as it only widens the existing gap.

Second, bonus issuances must henceforth be done compulsorily in dematerialised form. This is in line with the recent regulatory move of compulsory dematerialisation of securities and allotment and transfer of securities in dematerialised form including for issuers enroute an initial public offering. While this step is surely progressive, practically, this may impact certain issuers with legacy physical shareholders who remain untraceable. Probably, the registrars and stock exchanges may have to huddle up, to draw a road map to park such unclaimed bonus shares akin to the framework in case of rights issues, wherein such shares are kept in suspense account.

It is critical to note that the SEBI press release specifically mentions that the amendments to ICDR are ‘with the objective of increasing transparency and streamlining certain issue process’ and consequently, the above two developments are only some of the amendments approved by SEBI in its board meeting and one will have to wait for the fine print of the ICDR amendment regulations to get hold of the other amendments to ICDR.

This blog is authored by Capital Markets team.

SEBI notifies confidential DRHP filing norms

The Fourth Amendment introduces the construct of:

  • Confidential filing of draft offer documents for Indian issuers looking to undertake an initial public offering (“IPO”);
  • Monitoring of issue proceeds for preferential issues and qualified institutions placements (“QIP”), amongst others.

 

Highlights of the Process of Confidential Filing:

  1. The issuer prepares and files a draft red herring prospectus with SEBI and the stock exchanges (“Confidential DRHP”), however, this Confidential DRHP will not be available for public review or comments.
  2. The issuer needs to issue a public advertisement that it has filed the Confidential DRHP with SEBI, but not mentioning any other details of the public issue, neither guaranteeing that it will complete the IPO nor inviting comments from the public.
  3. SEBI reviews the Confidential DRHP and provides comments on the Confidential DRHP. Usually this involves a few rounds of comments from the regulator on the Confidential DRHP, which process one can reasonably expect to continue.
  4. Stock exchanges may also provide comments on the Confidential DRHP.
  5. After incorporating the comments received from SEBI and the stock exchanges, the issuer will be required to file an updated Confidential DRHP (“UDRHP-I”) reflecting the changes made to the Confidential DRHP pursuant to regulatory comments and other factual changes.
  6. At this stage, the issuer will also have to issue a second advertisement, informing the public of the filing of this UDRHP-I and inviting comments on the same. The period for inviting comments shall be 21 days. The key difference from the public filing process is that the draft document made available for public comments, has already undergone regulatory scrutiny and therefore more likely to be a more complete document from a disclosure perspective.
  7. Between stages 2 and 3, the issuer can approach a selected list of qualified institutional buyers (“QIB”), for marketing the IPO. This is a formalisation of the current public filing process, wherein issuers do conduct marketing post the filing of a draft red herring prospectus.
  8. Taking cue from the listing regulations, while the issuer is supposed to maintain a record of the investors it meets for marketing, presently there is no need to file this data with the regulators. Information shared with these QIBs will need to be limited to the Confidential DRHP. Parties may have to consider entering into non-disclosure agreements with these QIBs to ensure that the content of the Confidential DRHP remains within select set of participants and is not disseminated.
    Comment: It is interesting to note that while SEBI has asked for a minimum time gap of 7 working days between the closure of these investor meetings and filing of the UDRHP-I. These meetings can be conducted only until any observations are issued by SEBI on the Confidential DRHP.
  9. Fourth, after incorporating comments received from the public, the issuer will be required to file a further updated version of UDRHP-I, which is termed as UDRHP-II, to show changes pursuant to public comments and any factual changes.
  10. This UDRHP-II, with the IPO launch dates and other finalised details of intermediaries such as bankers to the offer, will be the red herring prospectus (“RHP”).
  11. Once finalised, the RHP will be filed with the registrar of companies (“ROC”).
    Comment: The process of opening and closing of the IPO remains the same as per the SEBI ICDR Regulations.

 

Other Key Considerations

Eligibility for OFS

  1. The holding period of 1 year for shares to be offered in an IPO is to be calculated from the date of filing of UDRHP-I.
  2. The Confidential DRHP will have to be redone in case there is any change in the size of the offer for sale by more than 50%.
    Comment: Practically, parties may have to decide on the indicative sellers in the IPO at the time of the Confidential DRHP itself, so that there are no substantial alterations, for various reasons, including the outcome of investor meetings.

 

Publicity

  1. Publicity activities for the period prior to UDRHP-I will require to be kept in line with past practices.
  2. Post filing of the UDRHP-I, the existing publicity restrictions and disclaimers will have to be followed.

 

Convertibles

  1. The issuer is entitled to retain outstanding convertible securities and rights available to shareholders to receive equity shares till SEBI issues observations.
  2. The public filing process contemplates that all such convertibles should be converted or be terminated or extinguished before the RHP is filed with the ROC.
  3. The Fourth Amendment has proposed that all such convertible securities and rights should be converted prior to the issuance of SEBI observations on the DRHP.
  4. The exceptions to this conversion requirement are options granted under employee stock option schemes and fully paid-up convertible securities, which are required to be converted on or prior to the RHP filing.
    Comment: While the wording has remained similar to the existing eligibility conditions under Regulation 5(2) of the SEBI ICDR Regulations, in future, SEBI may consider clarifying conversion of convertibles at the RHP filing with ROC stage for the confidential filing process.

 

Timelines

  1. In case of IPOs via the Confidential DRHP, the time period for opening of an IPO has been extended to 18 months from the date of final observations by SEBI, up from 12 months as per the public filing process.
  2. However, an issuer is required to file UDRHP-I by 16 months from the date of the observations.

 

Monitoring use of proceeds: Private placements not so private anymore?

  1. One of the key changes introduced through the Fourth Amendment is the requirement to have monitoring of use of proceeds of preferential allotments and QIPs above Rs. 100 crores.
  2. This requirement to have a credit rating agency monitor the use of funds raised (by other than by a public financial institution, insurance company or a bank) through preferential issues and QIPs aligns monitoring requirements with current IPOs and rights issues.
  3. Oversight of utilisation of money raised through public processes would always lead to greater compliance and is a move in the right direction. Having said that, SEBI may need to examine the existing disclosure regime for objects of QIPs and preferential issues in order to enable the credit rating agency to appropriately confirm the end-use.

 

Submission of offer documents

  1. In a reversal of the previous decentralisation of the IPO offer document review process, SEBI has not directed that offer documents be submitted to the head office.
    Comment: This has implications:
    a) a standardised approach to review of offer documents;
    b) while potential bottlenecking and increased review times due to increased number of offer documents, remains a potential area of concern.

Simplifying disclosures

As a follow up to ongoing directions issued by SEBI through observations and through the Association of Investment Bankers of India, certain amendments have been carried out to disclosure requirements in IPO offer documents under Part A of Schedule VI. The key changes can be summarised as follows:

 

Key Performance Indicators

  1. In order to simplify the use of performance indicators by issuers to showcase their growth and potential, SEBI has directed that all such ‘Key Performance Indicators’ or ‘KPIs’ will now need to be provided to all investors and defined in simple terms.
  2. If defined using technical terms, such technical terms must in turn be defined. KPIs must be certified by auditors/peer reviewed independent chartered accountant or cost accountant and such certificate will become a material document for inspection.
  3. The KPIs in turn must be approved by the audit committee of the issuer and explanation must be provided as to how the disclosed KPIs have been used historically by the management to track or monitor the operational or financial performance of the issuer.
  4. Importantly, KPIs disclosed to investors prior to the IPO must be disclosed in the offer document and those disclosed in the IPO offer document will require to continue to be disclosed post listing, for a one year period or till the IPO proceeds are utilised, whichever is later.

 

IPO price justification

Another amendment which is in line with recent SEBI directives, is the requirement to set out the justification of the IPO price.

  1. Issuers will now have to provide details of the price at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been issued in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period).
  2. Similarly prices at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been acquired by promoters, selling shareholders, members of the promoter group or shareholders with the right to nominate directors to the board have been transacted in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period) have to be disclosed.
  3. Moreover, SEBI has also now formalized the requirement of the price band advertisement specifically including a mention of the recommendation from a committee of independent directors of the issuer re the price band being justified based on quantitative factors / KPIs disclosed in ‘Basis for Issue Price‘ section vis-à-vis the weighted average cost of acquisition of primary issuance / secondary transaction(s) disclosed in ‘Basis for Issue Price‘ section.

 

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

Recent Key Reforms Enforced by SEBI

Pursuant to a board meeting of the Securities and Exchange Board of India (“SEBI”) held on September 30, 2022 (“Press Release”), a series of reforms and amendments were enforced by SEBI.

A summary of the key reforms and amendments are as follows:

  1. Introduction of pre-filing of offer document as an optional alternative mechanism for the purpose of initial public offer on the main board of stock exchanges

SEBI has approved the proposal of a pre-filing mechanism of offer documents as an alternative to the existing mechanism of filing offer documents, in relation to initial public offers on the main board of the stock exchanges.

SEBI pursuant to its “Consultation Paper on Pre-filing of Offer Document in case of Initial Public Offerings” (“Consultation Paper”), discussed the concerns of the issuer companies proposing to raise funds by an initial public offer (“IPO”), including disclosure of sensitive information in the draft red herring prospectus, which may be beneficial to competitors of such issuer companies, without the certainty that the IPO would be executed.

In terms of the Consultation Paper, issuer companies will have the option under the pre-filing mechanism to file the draft red herring prospectus with SEBI and stock exchanges, without making it available for public, for an initial scrutiny period only (“Confidential Filing”). SEBI will provide its observations on the Confidential Filing. In the event the issuer company proposes to undertake the IPO, an updated draft red herring prospectus after incorporating the comments received from SEBI on the Confidential Filing (“UDRHP I”) will be filed with the SEBI and stock exchanges and will also be made available for public comments for at least 21 days.

The issuer company will be required to file a further updated documents with the SEBI and stock exchanges incorporating (a) comments received from the public; and (b) any regulatory or factual updates in UDRHP I, as applicable (such document, “UDRHP 2”). Pursuant to SEBI taking note of changes in the UDRHP-II, the issuer company may file the Red Herring Prospectus (“
RHP”) with Registrar of Companies (“RoC”), stock exchange(s) and SEBI.

While SEBI pursuant to its Press Release has approved the proposal of pre-filing of offer document, the finalised framework for pre-filing mechanism of offer documents is yet to be notified by SEBI, based on comments received on the Consultation Paper. Further, while the consultation paper clearly specified that marketing of the IPO can only be undertaken post UDRHP-1 filing, a clarification on the same is pending from SEBI.

  1. Monitoring of utilization of issue proceeds raised through preferential issue and qualified institutions placement (QIP) issue, in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”)

SEBI has approved the proposal to introduce monitoring of utilization of issue proceeds raised through preferential issues and qualified institutions placement (QIP), with credit rating agencies as monitoring agencies, for issues of size above Rs. 100 crores. This will enable shareholders to stay abreast of and keep a track on the status of the utilization of funds raised by the company as against the disclosed objective of utilization of funds. Further, since monitoring of the utilization of proceeds is required for all pubic and rights issue with an issue size of above Rs 100 crores, this reform has now aligned the requirement of monitoring of utilization of proceeds with that of the public and rights issues, which we feel is a positive step towards attaining overall investor protection.

  1. Disclosure of key performance indicators (“KPIs”) and price per share of the issuer, in public issues, based on past transactions and past fund raising from the investors

Issuers proposing to raise funds by IPOs will now have to disclose the (i) KPIs, and (ii) price per share of the issuer company, based on past transactions and past fund raising done by it from investors prior to IPO (“Pre-IPO Fund Raising”), under the ‘Basis for Issue Price’ section of the offer document, as well as in the price band advertisement to be issued by the issuer company in terms of the SEBI ICDR Regulations.

In relation to the Pre-IPO Fund Raising, SEBI has specified that the price per share of the issuer company based on primary or new issue of shares and based on secondary sale / acquisition of shares, during the 18 months period prior to the IPO will have to be disclosed and in case there are no such transactions during the 18 months period prior to IPO, then information for price per share of the issuer company would have to disclosed based on last five primary or secondary transactions done within three years of the IPO. Further, the weighted average cost of acquisition (“WACA”) based on primary/ secondary transaction(s) and ratio of WACA vis-à-vis IPO floor price and cap price will have to be disclosed in the offer documents and in the price band advertisement.

A committee of the independent directors of the issuer company will also have to provide a justification on the price band based on quantitative factors/ KPIs vis-à-vis the WACA of primary issuance and secondary transaction(s).

While this amendment is a step in the right direction, there are certain points which may need clarity from SEBI. For instance, in relation to disclosure of price per share of the issuer company, SEBI in its consultation paper dated February 18, 2022, clearly specified that Pre-IPO Fund Raising of both equity shares and convertible shares would have to be considered for calculating the price per share of the issuer company. However, basis the Press Release, we are unable to ascertain whether the issuance of both convertible securities and equity shares would have to be considered for the calculation of the aforesaid parameter.

  1. Amendments to the Listing Regulations in re appointment and removal of independent directors

In terms of Regulation 25 (2A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”), the appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. Further, in accordance with the Section 149 (10) of the Companies Act, 2013, no independent director shall hold office for more than two consecutive terms.

SEBI by way of its Press Release has provided flexibility in the approval process for appointment and / or removal of independent directors by approving an alternate method for the appointment and removal of independent directors appointed for the first term

If the special resolution for appointment of an independent director is unable to attain the requisite majority, under alternative method, such independent director will be deemed to be duly appointed if following thresholds are met:

  • Threshold for an ordinary resolution in terms of the Companies Act, 2013;
  • Threshold for majority of minority shareholders.

 

The aforesaid thresholds would similarly be applicable for the removal of an independent director appointed under this alternate mechanism.

Further, while SEBI in its “Consultation Paper on Review of Regulatory Provisions related to Independent Directors” dated March 1, 2021, has defined “minority shareholders” as shareholders, other than the promoter and promoter group, we await clarification on the exact scope and meaning of “minority shareholders”.

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

SEBI advisory on exemptions relating to Promoter Group

Securities and Exchange Board of India (“SEBI”) has issued an advisory dated April 26, 2022, to the Association of Investment Bankers of India mandating changes and clarifying processes in for exemptions with respect to classification and inclusion of details of members of promoter group of a company en route an initial public offering (“Advisory”).

Regulation 2 (1) (pp) (ii) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”) includes an immediate relative of a promoter or its spouse in the definition of the promoter group. As per the Advisory, any exemption sought with respect to inclusion of such members in promoter group of the issuer shall have to be necessarily accompanied with either (a) a reference or affidavit from the relative stating in clear terms that the person does not want to be part of the promoter group or (b) a memorandum of understanding (“MoU”) duly signed between the promoter and the said relative. Accordingly, formal communication between the issuer or promoter and the concerned relative of the promoter will require to be placed before SEBI along with the exemption application. The communication may be supported by an affidavit issued by the relative declaring their intention to not be named as part of the promoter group. Alternatively, a formal family settlement agreement or MoU setting out estrangement will be required to be presented.

Further, an immediate relative in relation to whom an exemption is being sought, should not be holding any interest in the issuer including through equity or debt, or as a vendor, supplier, client or otherwise. Therefore the issuer or promoter will require to demonstrate complete separation of business interests of the immediate relative from the issuer. However, no clarification has been provided in respect of time frame or period within which such transactions or interests may have been held.

The Advisory also clarifies that any such exemption shall have to be obtained prior to filing of the draft red herring prospectus with SEBI.

Prior to this Advisory, issuers used to send applications to the relatives of the promoters and their spouses for obtaining their consent for inclusion of their name(s) in the offer documents, in the absence of obtention of which, it would seek an exemption from SEBI for removal of the name of such relative(s) from the promoter group and non-disclosure of confirmation required from promoter group in respect of such relative(s). The exemption applications were previously filed immediately prior to or co-terminus with the filing of the draft offer document with SEBI. Therefore, the Advisory has escalated concerns that this requirement to obtain positive confirmations or affidavits or additional documentation demonstrating estrangement, may potentially be a serious hurdle to IPO-bound companies.

While SEBI’s intention appears to be prevention of the abuse of exemption process to conceal disclosure of some promoter group members, the proposed solution may give rise to regulatory impediment in genuine cases where a member of the promoter group may mala fide withhold signing of necessary documents.

This blog is authored by the JSA Capital Markets Team.

SEBI’s views of accessibility and legibility

A summary of the Accessibility Guidelines are as follows:

Quick Response Code (“QR Code”)

For all draft red herring prospectuses (“DRHPs”) filed on or after April 1, 2022, the cover page of the DRHP, red herring prospectus or prospectus(“offer document”) should contain a QR Code which links to a separate page on the website of the lead merchant banker (colloquially known as the left lead), where the offer documents, abridged prospectus, any corrigenda or addenda, and price band advertisement is available.

The QR Code should lead through not more than one click through filter (for jurisdiction specific restrictions or disclaimers) to the offering material.

Non-left lead merchant bankers may continue to upload the document based on current practices.

 

Content of offer documents

Cover Page: To ensure legibility, the Accessibility Guidelines sets out that the cover page of offer documents (containing the QR Code), should be at least font size 10 with utilisation of margins to ensure space for the increased font size.

Financials: Financial statements should be included in a manner such that legibility is ensured, including through use of landscape formats and narrower page margins.

Capital Structure: Details of allottees should be included in the table itself to the extent possible, especially for allotments to promoters, members of the promoter group or institutional shareholders. Only disclosures on allotments to employees or a large number of allottees should be provided in paragraph form through footnotes.

Risk Factors: Language in risk factors should be simplified to avoid repetition within and across risk factors. Percentages, wherever are mentioned, should be accompanied with corresponding numerical amounts. Data, as much as possible, should be presented in a tabular format for better understanding and legibility.

 

SEBI Observation responses and UDRHP

SEBI Responses: SEBI response should be properly formatted and with font size of at least 10. Responses provided to SEBI observations should clearly indicate whether the information is proposed to be disclosed in the offer document or is for SEBI’s review only. If data is not proposed to be disclosed, the rationale for the same should be clearly mentioned.

UDRHP: Changes to offer document as a result of SEBI observations should be highlighted in a different colour, in the comparison submitted to SEBI, for easier review.

 

Main board listing

All advertisements relating to an issue, should clearly disclose that the securities will be listed on the main board or on SME platforms. Similar disclosures to be made in case of advertisements for rights issues.

 

This blog is written by Pracheta Bhattacharya and Harish Choudhary.

Modification in timelines for the updation of Scheme Information Document (SID) and Key Information Memorandum (KIM)

SEBI vide circular dated 04 March 2021 (“March Circular”) had prescribed the procedure for the updation of SID and KIM of Mutual fund schemes. According to Paragraph 11.1 (i) of this March Circular, SID should be updated once in six months at the end of September and March. This timeline has been modified by  the circular  dated 30 April 2021 (“April Circular”) wherein SID shall be updated within one month from the end of the half-year, based on the relevant data and information as at the end of September and March respectively.

Paragraph 11.1(iv) of the March Circular, which stated that KIM shall be updated atleast once a year has also been modified under the April Circular, and KIM shall now be updated atleast once in half-year, within one month form the end of the respective half-year, based on the relevant data and information as at the end of September and March.

In light of the difficulties expressed by the industry in light of continuing Covid Scenario, the updation of SID and KIM for the half-year ended March 2021, can be completed by 31st May 2021.

Securities market code to include SEBI Act – Government securities act and depositories act, Budget 2021

The consolidation of securities laws, existing decriminalisation of offences under the Companies Act and the proposed decriminalisation under the LLP Act marks an important move towards making Indian corporate legal framework, simpler, business friendly and ultimately (hopefully) reducing compliance costs.  The securities market code is in line with previous discussions on the NFRA. It marks a step towards streamlining the multiple laws, ordinances, guidelines and regulations. If drafted and executed in a proper manner, it will be helpful to market participants and remove any possible conflicts in the regulatory framework and will provide clarity in policy making to investors and stakeholders.

Quote by Arka Mookerjee, published in CNBC, Moneycontrol, Indian Express, Fortune India, IIFL Group, Yahoo.com, Firstpost.

Latest developments by SEBI on account of COVID-19

Since March 2020, the Securities and Exchange Board of India (SEBI) has relaxed various provisions of rules and regulations for listed entities on account of the pandemic. Recent relaxations include:


(i) Extension of relaxation from compliance to REITs and InvITs.

(ii) SEBI (Substantial Acquisition of Shares and Takeovers) Third Amendment Regulations, 2020.

(iii) SEBI (Issue of Capital and Disclosure Requirments) Third Amendment Regulations, 2020.

(iv) Relaxation in timelines for compliance with regulatory requirements.

(v) Relaxation of time gap between two Board/ Audit Committee meeting of listed entities.

Relaxation to Minimum Public Shareholding Requirements

Background

The Securities and Exchange Board of India (“SEBI”) has, after taking into consideration requests received from listed entities and industry bodies as well as considering the prevailing business and market conditions, decided to grant relaxation from the applicability of the circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) on the actions to be taken in case of non-compliance of the minimum public shareholding (“MPS”) requirements.

What is minimum public shareholding?

In terms of the Securities Contracts (Regulation) Rules, 1957, as amended (“SCRR”) read with Regulation 28 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“Listing Regulations”), listed companies are required to maintain public shareholding of at least 25%. The obligation to reach and maintain this MPS threshold of 25% is attracted in three separate instances:

(a) Initial listing – In terms of Rule 19(2)(b) of the SCRR, the minimum offer and allotment to public in terms of an offer document by a company seeking listing, has to be within the range of at least 10% to at least 25%, subject to the post-issue market capitalisation of the listed company. If the post-issue market capitalisation of the listed company is more than Rs. 1,600 crores, the listed entity has the option, but not obligation, to offer and allot less than 25% of its capital to the public. The relaxation of issuing less than 25% of its capital to the public is available subject to the listed entity meeting the MPS threshold of 25% within a period of three years from the date of listing of its securities;

(b) Continuous listing – In terms of Rule 19A of the SCRR, every listed company, other than a public sector company, is required to maintain the MPS threshold of at least 25%. In case of a public sector company which has public shareholding below 25% on the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, a period of two years has been provided from the date of such commencement to restore the MPS to 25%. For companies covered under (a) above, the obligation to maintain MPS initiates from the date upon which the threshold of 25% MPS is first achieved.

(c) Violation of continuous listing – In the event that a listed entity, other than a public sector company, breaches the MPS threshold of 25%, it is required to bring back MPS threshold to 25% within a period of 12 months from the date of the breach of the threshold. For public sector companies, a two-year window is provided to restore the MPS threshold to 25%. Further, a three-year time period is provided to listed companies for restitution of the MPS threshold for breaches caused by issue of depository receipts or implementation of a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016.

Non-compliance of the MPS requirements

In terms of Regulation 97 of the Listing Regulations, a recognized stock exchange is charged with the duty to monitor compliance with the provisions of the Listing Regulations. Further, Regulation 98 of the Listing Regulations provides for penal actions that may be undertaken by stock exchanges in case of failure to comply with the provisions of the Listing Regulations, including the requirement to maintain MPS threshold. Towards this end, SEBI issued a circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115), directing stock exchanges to review compliance with MPS requirements based on shareholding pattern/ other filings made with them by the listed entities from time to time and within fifteen days from date of observation of non-compliance, to issue notices to such entities intimating all actions taken/ being taken as per this circular and advise the entities to ensure compliance. On observing non-compliance, the recognised stock exchanges may take actions such as (i) levying of a fine against the listed entities for each day of non-compliance; (ii) freezing the entire shareholding of the promoters and promoter group in conjunction with depositories; (iii) freezing of all securities held in the dematerialized beneficial ownership accounts of the promoters and promoter group; and (iv) banning the promoters, promoter group and directors from taking up any new position as director of a listed entity. The recognised stock exchange may also consider compulsory delisting of the non-compliant listed entity.

Manner of achieving MPS

SEBI has by way of a circular dated November 30, 2015 (Circular No. CIR/CFD/CMD/14/2015) provided the mechanisms through which a listed entity may achieve compliance with MPS threshold. The approved mechanisms include (a) issue of fresh shares to public through prospectus (further public offering); (b) offer for sale of shares by promoters to public through prospectus (further public offering); (c) sale of shares by promoters through the stock exchange offer-for-sale mechanism; (d) offer for sale of shares by promoters by way of a qualified institutions placement; (e) rights issues with the promoters and/or members of the promoter group forgoing their entitlement; and (f) bonus issues with the promoters and/or members of the promoter group forgoing their entitlement. Mechanisms not specifically set out in this circular or elsewhere under SEBI regulations, can also be utilised, subject to approval of SEBI.

Relaxation provided by SEBI

Given the current volatility in the markets, SEBI, in its recent circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) (the “Circular”) has provided a temporary relaxation to listed entities for whom the due date for complying with the minimum public shareholding fell within the time period of March 1, 2020 to August 31, 2020. SEBI has also advised recognized stock exchanges not to take any penal action as envisaged in the SEBI circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) against such entities in case of non-compliance during the said period. Penal actions, if any, initiated by stock exchanges from March 1, 2020 till May 14, 2020 for non-compliance of the MPS requirements by such listed entities may be withdrawn.

The Circular shall come into force immediately.

Please refer to the SEBI circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) for more details.

Key relaxations provided by SEBI from the disclosure obligations under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

In view of the COVID 19 pandemic, the Securities and Exchange Board of India (“SEBI”) has provided certain relaxations to listed entities, from compliance with certain provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) vide its circulars, most recent of which is the circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), which provides for (i) additional relaxations in line with clarifications released by the Ministry of Corporate Affairs (“MCA”) dated April 8, 2020 and April 13, 2020; and (ii) further extension to certain relaxations already provided by SEBI vide its circulars dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38), March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) and April 23, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/71.

Set out below are the key relaxations to the SEBI LODR Regulations provided:

1. Extension of timelines for submission of certificates

In terms of the SEBI LODR Regulations, listed entities are required to file certain compliance certificates with the stock exchanges, indicating compliance with regulatory requirements. These include

(a) Certificate on maintenance of share transfer facility as per Regulation 7 (3) which is to be filed within one month of the end of each half of the financial year.

Pursuant to the SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38), the due date for the submission of the compliance certificate for the half year ended March 31, 2020 has been extended from April 30, 2020 to May 31, 2020.

(b) Secretarial compliance report for listed entities and their material unlisted subsidiaries in terms of Regulation 24A, which is to be annexed to the annual report.

This requirement has been relaxed vide the SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38) from May 30, 2020 to June 30, 2020 for the financial year ended March 31, 2020.

(c) Certificate from practicing company secretary on share certificates as per Regulation 40(9) to be submitted within one month of the end of each half of the financial year, certifying that all certificates have been issued within thirty days of the date of lodgement for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies and submit the same with the stock exchange.

SEBI vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), has extended the due date for submission of the aforementioned certificate, for the half year ended March 31, 2020, from April 30, 2020 to May 31, 2020.

2. Financial results

As per Regulation 33(3)(c) of the SEBI LODR Regulations, a listed entity is required to submit with the stock exchange, its standalone and consolidated (if applicable) quarterly financial results within 45 days of the end of the particular quarter. This requirement has been relaxed for the quarter ended March 31, 2020 pursuant to SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38). The due date for submission of the aforementioned financial results is revised from May 15, 2020 to June 30, 2020.

Further, as per Regulation 33(3)(d) of the SEBI LODR Regulations, a listed entity is required to submit with the stock exchange, its standalone and consolidated (if applicable) annual audited financial results within sixty days of the end of the financial year. This requirement has been relaxed for the quarter ended March 31, 2020 pursuant to SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38). The due date for submission of the aforementioned financial results is revised from May 30, 2020 to June 30, 2020.

In addition to the above, by way of SEBI circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), SEBI took note of the representation from listed entities that are banks and insurance companies with relation to the difficulties faced by them in the preparation of consolidated financial results under regulation 33(3)(b) in view of different accounting standards being followed by companies belonging to same group and the difficulties in restating those financials as per Indian Accounting Standards (“Ind AS”) due to the prevailing circumstances in view of COVID 19 pandemic. The Reserve Bank of India through its notification dated March 22, 2019, has deferred the implementation of Ind AS until further notice to provide relief to scheduled commercial banks.

In light of the above, SEBI in the circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79) has clarified that listed entities which are banking and / or insurance companies or having subsidiaries which are banking and / or insurance companies may submit consolidated financial results under regulation 33(3)(b) for the quarter ending June 30, 2020 on a voluntary basis. However, they shall continue to submit the standalone financial results as required under regulation 33(3)(a) of the LODR. If such listed entities choose to publish only standalone financial results and not consolidated financial results, they shall give reasons for the same.

3. Provisions relating to frequency of meetings

As the lockdown has imposed restrictions on physical gatherings and companies have been facing difficulties in conducting meetings completely through electronic audio-visual means, SEBI has provided certain relaxations pertaining to the frequency of meetings to be held by listed entities. It may be noted that certain of these provisions will also require a corresponding relaxation from the MCA, which one can hope will be forthcoming shortly.

(a) As per Regulation 17(2), the board of directors of a listed entity is required to meet at least four times a year, with a maximum time gap of one hundred and twenty days between any two meetings and as per the Regulation 18(2)(a), the audit committee of a listed entity is also required to meet at least four times a year, with a maximum time gap of one hundred and twenty days between any two meetings. SEBI vide its circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38) has exempted listed entities from observing the maximum gap between the meetings held or proposed to be held between December 1, 2019 and June 30, 2020. However, it has been clarified that there is no relaxation provided to the board of directors / audit committee from ensuring that they meet four times in a year.

(b) SEBI has vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), extended the time limit provided to listed entities to have one meeting of the nomination and remuneration committee, stakeholders relationship committee and risk management committee as required under Regulation 19(3A), Regulation 20(3A) and Regulation 21(3A), respectively, of the SEBI LODR Regulations. A listed entity is now required to comply with this requirement by June 30, 2020 instead of March 31, 2020.

(c) As per Regulation 44(5) of the SEBI LODR Regulations, the top 100 listed entities by market capitalization, determined as on March 31st of every financial year, shall hold their annual general meetings within a period of five months from the date of closing of the financial year. SEBI vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), has extended the time limit for conducting the annual general meeting from August 31, 2020 to September 30, 2020. Further, SEBI has in its circular dated April 23, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/71 clarified that the extended time limit of up to September 30, 2020 shall also be applicable to the top 100 listed entities by market capitalization, whose financial year ended on December 31, 2020.

4. Provisions relating to publication and dispatch of forms and advertisements

In view of the impact of the current lockdown on postal services and physical newspapers, SEBI has also dispensed with or relaxed requirements relating to postal dispatch of forms or publication in physical newspapers, including:

(a) SEBI vide its circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), has temporarily dispended the requirement of sending proxy forms for general meeting to holders of securities as per Regulation 44(4), in case such meetings are held through electric mode. This relaxation is available for listed entities who conduct their AGMs through electronic mode during the calendar year 2020 (i.e. till December 31, 2020).

(b) Regulation 36 (1)(b) and (c) of SEBI LODR Regulation prescribes that a listed entity shall send a hard copy of the statement containing salient features of all the documents, as prescribed in Section 136 of the Companies Act, 2013 to the shareholders who have not registered their email addresses and hard copies of full annual reports to those shareholders, who request for the same, respectively. Regulation 58 (1)(b) &(c) of the SEBI LODR Regulations extend similar requirements to entities which have listed their NCDs and NCRPS. SEBI vide its circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), has dispensed the aforementioned requirements for listed entities who conduct their annual general meetings during the calendar year 2020 (i.e. till December 31, 2020).

(c) SEBI vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48) read with its circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79) has exempted publication of advertisements in newspapers, as required under Regulation 47 of SEBI LODR Regulations, for all events scheduled till June 30, 2020, since some newspapers had stopped their print versions due to the COVID 19 pandemic.

5. Timelines for provision of intimation to stock exchanges

In view of the difficulties caused by the pandemic to normal operations of companies, SEBI has provided temporary relaxations regarding certain intimations to be provided to stock exchanges:

(a) As per Regulation 29 (2) of the SEBI LODR Regulations, stock exchanges need to be provided prior intimation about meetings of the board (excluding the date of the intimation and date of the meeting) as follows: (i) at least five days before the meeting if financial results are to be considered; and (ii) two working days in other cases.

SEBI vide its circular dated April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) has decided that the above requirement under Regulation 29 (2) of SEBI LODR Regulations of prior intimation of five days / two working days shall be reduced to two days, for board meetings held till July 31, 2020.

(b) As per Regulation 39 (3) of the SEBI LODR Regulation, requires listed entities to submit information regarding loss of share certificates and issue of the duplicate certificates, to the stock exchange within two days of the listed entity receiving information.

SEBI vide its circular dated April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) has decided that any delay beyond the stipulated time will not attract penal provisions laid down vide SEBI circular no. SEBI/HO/CFD/CMD/CIR/P/2018/77 dated May 3, 2018. This relaxation is for intimations to be made between March 1, 2020 to May 31, 2020.

6. Use of digital signature and electronic payment methods

(a) SEBI vide its circular dated April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) has clarified that authentication / certification of any filing / submission made to stock exchanges under the SEBI LODR Regulations may be done using digital signature certifications until June 30, 2020.

(b) As per Regulation 12 of the SEBI LODR Regulations, issuance of ‘payable at par’ warrants or cheques in case it is not possible to use electronic modes of payment. Further, in case the amount payable as dividend exceeds Rs.1500, the ‘payable-at-par’ warrants or cheques shall be sent by speed post.

SEBI by way of the circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79) has clarified that the requirements of this regulation will apply upon normalization of postal services and in cases where email addresses of shareholders are available, listed entities shall endeavor to obtain their bank account details and use the electronic modes of payment specified in Schedule I of the SEBI LODR Regulation.

7. Deferral of effective date of operation of the SEBI circular on standard operating procedure

SEBI vide circular no. SEBI/HO/CFD/CMD/CIR/P/2020/12 dated January 22, 2020 issued the Standard Operating Procedure (“SoP”) on imposition of fines and other enforcement actions for non-compliances with provisions of the SEBI LODR Regulations, the effective date of operation of which is for compliance periods ending on or after March 31, 2020. Pursuant to the SEBI circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), the said circular dated January 22, 2020 shall now come into force with effect from compliance periods ending on or after June 30, 2020. It may be noted that the SoP circular dated May 3, 2018 would be applicable till such date.

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